01—Abstract
Summary
Summary of the 10-K filed February 29, 2012. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group's 2011 Form 10-K shows a company that grew earnings modestly in a difficult environment, though net income declined.
Net income was $3.1 billiona, down 10% from $3.4 billion in 2010, and diluted EPS from continuing operations was $5.64 versus $5.02. The decline reflected $324 million of residential mortgage foreclosure-related expenses, a $198 million noncash charge on the redemption of trust preferred securities, and lower net interest income, partly offset by a sharp drop in the provision for credit losses to $1.2 billion from $2.5 billion. Total assets were $271.2 billion, deposits $188.0 billion, and shareholders' equity $34.1 billion.
Credit quality improved meaningfully: nonperforming assets fell 19% to $4.2 billionb, net charge-offs dropped 44% to $1.6 billion, and the allowance covered 122% of nonperforming loans. Capital strengthened, with the Tier 1 common ratio rising to 10.3% from 9.8%. Net interest margin compressed to 3.92% from 4.14%, driven by lower purchase accounting accretion and the low-rate environment, and noninterest income declined 5%.
The filing's forward-looking focus centers on the pending RBC Bank (USA) acquisition for $3.45 billionc, expected to close in March 2012 and add roughly $18 billion of deposits and $16 billion of loans. Management guided to mid-to-high single-digit growth in 2012 net interest income and mid-single-digit growth in noninterest income and expenses, with provision expected to be stable.
Investors should weigh the upside of an expanded footprint against integration risk, Dodd-Frank and Basel III capital requirements, and ongoing mortgage-related legal and regulatory exposure, including consent orders with the Federal Reserve and OCC. Capital return, including dividend increases and buybacks, remains subject to the 2012 Federal Reserve CCAR review.
02—Key points
Key Highlights
- Net income of $3.1 billion (down 10% from $3.4 billion); diluted EPS from continuing operations of $5.64 vs. $5.02 in 2010
- Provision for credit losses fell 54% to $1.2 billion; nonperforming assets declined 19% to $4.2 billion and net charge-offs fell 44% to $1.6 billion
- Tier 1 common ratio rose to 10.3% (from 9.8%); total shareholders' equity grew to $34.1 billion, with a quarterly common dividend raised to $0.35 per share in 2011
- Net interest margin contracted to 3.92% (from 4.14%) and net interest income fell 6% to $8.7 billion on lower purchase accounting accretion and low rates
- Pending $3.45 billion acquisition of RBC Bank (USA), with approximately $25 billion in pro forma assets and 400+ branches across six Southeastern states, expected to close March 2012
- Noninterest expense rose 6% to $9.1 billion, driven by $324 million of mortgage foreclosure-related costs and a $198 million trust preferred redemption charge
- Mortgage-related exposure remains significant: consent orders with the Federal Reserve and OCC, a pending multi-state servicer review, and a reserve of $130 million for repurchase and indemnification liabilities
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 29, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $14.33B$15.18B | −5.6% |
| Interest Expense | $1.49B$1.92B | −22.2% |
| Net Income | $3.07B$3.40B | −9.6% |
| EPS (Basic) | $5.70$5.80 | −1.7% |
| EPS (Diluted) | $5.64$5.74 | −1.7% |
| Shares Outstanding (Basic) | 524.00M517.00M | +1.4% |
| Shares Outstanding (Diluted) | 526.00M520.00M | +1.2% |
05—Questions
Frequently Asked Questions
How did PNC's core earnings and revenue trend in 2011?
Total revenue fell about 6% to $14.3 billion, as net interest income declined 6% and noninterest income declined 5%. Lower purchase accounting accretion, Regulation E overdraft rules, debit interchange limits, and lower commercial mortgage servicing values pressured results, partly offset by higher asset management fees and residential mortgage loan sales revenue. Management expects 2012 net interest income to grow in the mid-to-high single digits and noninterest income in the mid-single digits, including the RBC acquisition.
What are the main risks to PNC's mortgage business?
PNC faces investigations and inquiries from federal and state authorities on mortgage lending and servicing, a consent order with the Federal Reserve and OCC from April 2011, and potential additional actions arising from the industry-wide servicer review. The company also faces investor repurchase and indemnification claims, with unresolved claims of $485 million at year end, and possible class action litigation. Management said it could not predict the ultimate cost of these matters, and the company estimates reasonably possible losses of up to about $550 million on disclosed legal matters.
How does the RBC Bank acquisition change PNC's franchise?
The RBC Bank (USA) deal would expand PNC's retail footprint to about 2,900 branches across 17 states and Washington, D.C., entering North Carolina, Alabama, South Carolina and expanding in Florida, Georgia and Virginia. Management expects approximately $18 billion of deposits and $16 billion of loans to be added and $170 million of merger and integration costs in the first quarter of 2012, plus about $600 million of RBC operating expenses for ten months. Regulatory approvals from the Federal Reserve and OCC were received in December 2011. Integration and deposit attrition remain key risks.
What is PNC's capital position and how might it affect shareholder returns?
At year end, PNC's Tier 1 common ratio was 10.3%, Tier 1 risk-based capital 12.6%, and total risk-based capital 15.8%. Basel III's proposed phase-in and Dodd-Frank rules, including elimination of Tier 1 treatment for $2.4 billion of trust preferred securities, could raise capital needs. Dividend increases and share repurchases for 2012 depend on the Federal Reserve's 2012 CCAR assessment, which PNC expected to receive by the end of the first quarter of 2012. The Federal Reserve has signaled that payout ratios above 30% of projected earnings would receive close scrutiny. No shares were repurchased in 2011.
Is PNC's credit quality improving sustainably?
Credit metrics improved through 2011: nonperforming loans fell to 2.24% of total loans from 2.97%, accruing loans past due 30 to 89 days declined, and commercial criticized loans fell 28%. However, troubled debt restructurings rose to $2.2 billion, with $1.1 billion nonperforming, and residential and home equity portfolios remain under pressure. The company also warned that a return of the provision toward crisis levels would reduce net income, and noted that the provision is expected to remain stable in 2012.
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